In 2025, the U.S. National Retail Federation estimated that 15.8% of annual retail sales were returned, totaling an astounding $849.9 billion. For online purchases specifically, this number surged to 19.3%, according to CNBC. This trend is particularly pronounced among younger consumers, with shoppers aged 18 to 30 averaging nearly eight online returns last year.
Most returned items never make it back to shelves, often costing retailers more to process than the refund's value. This margin erosion has prompted the retail industry to seek innovative solutions.
How AI Bridges the Online Fit Gap
The primary reason behind high return rates and abandoned shopping carts is uncertainty over how clothing will fit and look in person. Historically, tech companies have tried to solve this, but recent advancements in generative AI have made virtual try-on applications effective enough to make a measurable difference. These new tools create highly realistic visual simulations.One such innovation comes from Catches, an AI startup that developed a platform enabling users to create a "digital twin" of themselves. This digital double can then virtually try on clothes with what Catches calls "mirror-like realism." Unlike previous models that merely presented static images, this platform integrates the physics of fabric texture, showing how material interacts with a moving body. Catches, built on Nvidia's CUDA platform, launched its application last month on luxury brand Amiri's website for select items.
"The reason it's solvable now in terms of timing is that you have to be able to run visuals for end users on bare metal in the cloud, cheaply enough to make a [return on investment] for brands," Ed Voyce, founder and CEO of Catches, told CNBC. He explains that this technology has the potential to fundamentally change consumer expectations.
Impact on Retail Margins and Consumer Expectations
AI tools are not just about reducing returns; they also enhance the overall purchasing experience. While e-commerce drives retail sales growth, maintaining profit margins remains a challenge for retailers facing rising costs and price-sensitive consumers. While returns are a major drag on profits, consumers consider free returns essential, with 82% viewing it as critical, according to NRF data.Some retailers have implemented controversial strategies like charging for return shipping to protect margins. Zara, owned by Inditex, was an early adopter of return fees, which helped protect its gross margin and discouraged "bracketing"—the practice of buying multiple sizes to try at home. Zara also rolled out its own "Zara try-on" virtual tool. Meanwhile, online fast fashion retailer ASOS reported a 160 basis point reduction in its returns rate, partly driven by its virtual try-on partnership with AIUTA. This tool allows customers to see clothing on various body types and skin tones.
Platforms like Shopify have integrated AI virtual try-on apps like Genlook, aiming to boost buyer confidence and conversion rates while reducing costly returns. Tech giants such as Amazon, Adobe, and Google are also developing and rolling out their own virtual try-on technologies. Google's virtual try-on tech is accessible directly within product search results across its platforms, as of April 30. Catches projects its app can drive a 10% increase in conversions and a 20- to 30-times return on investment for its brand partners. While it has not yet quantified the exact reduction in returns, the company targets "massive reductions."
Guggenheim Senior Managing Director Simeon Siegel acknowledges the clear benefits but cautions that AI is not a "magic wand." Beyond fit, retailers are exploring AI for inventory management, customer targeting, and fraud prevention. Siegel emphasizes that while technological advancements are crucial, "What you sell is always going to be more important than how you sell." The core value proposition of a product remains paramount, even as AI transforms the customer experience.
